China figures cast global shadow

Bloomberg

Sun, Jun 10, 2012 - Page 11

China’s consumer prices rose the least they have done in two years last month and industrial output and retail sales trailed estimates, adding pressure for more loosening following this week’s interest-rate cut.

Inflation slowed to 3 percent from a year earlier, the National Bureau of Statistics said yesterday, compared with the 3.2 percent median forecast in a Bloomberg News survey. Production increased 9.6 percent, lower than a projected 9.8 percent gain and retail sales increased 13.8 percent, the Beijing-based bureau said in separate statements.

Yesterday’s data adds to concerns that global growth is stalling as Greece teeters on the edge of a euro exit, Spain prepares a request for a massive bank bailout and US job growth weakens. Chinese Premier Wen Jiabao (溫家寶) may introduce additional stimulus to protect a full-year growth target of 7.5 percent even as the nation wrestles with bad loan risks from local government debt.

“These data should defeat any remaining complacency that the policy response has been adequate to maintain steady growth,” said Shen Jianguang (沈建光), chief Asia economist for Mizuho Securities Asia Ltd in Hong Kong. “More dramatic easing, especially in housing and local government financing vehicles is urgently needed and necessary to avoid a hard landing in the Chinese economy.”

Shen, who previously worked for the European Central Bank, said he expects at least one more reduction in interest rates and three cuts in banks’ reserve requirements this year.

The reserve ratio has dropped by 150 basis points in three cuts since November to spur credit growth and now stands at 20 percent for the biggest banks.

The People’s Bank of China lowered benchmark lending and deposit rates by 25 basis points effective on Friday, taking one-year borrowing costs down to 6.31 percent and one-year savings rates to 3.25 percent. It also allowed banks more leeway to set their own interest rates.

Slowing inflation “is what gave the central bank the confidence to cut interest rates” on June 7, Liu Li-Gang (劉利剛), the head of Greater China economics at Australia & New Zealand Banking Group Ltd (ANZ) who accurately forecast the consumer prices reading, said in Hong Kong. “Given the falling producer prices, China’s inflation outlook remains benign and we expect another cut in banks’ reserve requirements in June to boost slowing economic activities,” Liu said.

ANZ said in a note on Friday that it expects reductions totaling another 150 basis points this year, while further interest-rate cuts will depend on inflation.

China customs data expected today may show exports and imports grew last month by less than the government’s 10 percent target this year. Overseas sales probably increased 7.1 percent from a year earlier, while purchases rose 5.5 percent, according to the median estimates in Bloomberg News surveys.

Nations are acting to shore up growth as the global economy suffers its steepest slowdown since the recession ended in 2009.

China’s industrial production growth last month was below 10 percent for a second month, yesterday’s data showed, the first time that has happened in three years. Power output rose at the second-slowest pace in three years excluding distortions caused by the timing of the Lunar New Year holiday.

Retail sales, which are not adjusted for inflation, rose the least in almost six years, except for January-February holiday months. The data include government purchases.

“China’s producers are seeing sharp deflation, pointing to a worrying lack of final demand,” said Alastair Thornton, a Beijing-based economist with IHS Global Insight.

The decline in prices, combined with the “sharp” drop in the prices gauge in last month’s purchasing managers’ index “points to considerable sluggishness in domestic manufacturing activity” and should “act as a spur for the government to move more aggressively,” he said.

Anhui Conch Cement Co (安徽海螺水泥), the nation’s biggest cement producer, warned last week that its first-half profit probably fell more than 50 percent as prices of its products “dropped significantly” due to slower growth in fixed-asset investment.

China’s economy expanded 8.1 percent in the first three months from a year earlier, the fifth quarterly deceleration and the slowest pace in almost three years. Growth may slide to 7 percent or “slightly below” this quarter, Credit Suisse Group AG estimated last month, while Citigroup Inc. forecasts a 7.5 percent pace.